In 2011-0431871I7 (released last week), the CRA’s Ruling Division (Rulings) advised a local Tax Services Office (TSO) that a portion of a “procurement licence fee” under franchise agreement would be subject to Canadian withholding tax. Briefly, a US company (US Co) entered into a franchise licence agreement (Franchise Agreement) with a Canadian company (Canco). The Franchise Agreement granted to Canco several rights in connection with operating or sub-licensing brand name retail outlets in Canada (Franchise Rights). In US Co’s standard franchise agreements US Co would have the right to procure franchise-related products and equipment required and ordered by Canco, and would earn a mark-up on the subsequent sale of such products and equipment to Canco. In this particular case, Canco negotiated the right to procure such products and equipment directly from the suppliers, and agreed to pay US Co a “procurement licence fee” (PLF) in exchange for this right. The TSO asked the CRA rulings division whether the PLF was subject to withholding tax under s. 212(1)(d). In a (very) lengthy analysis, the CRA unfortunately concluded that portions of the PLF could be subject to withholding tax under s. 212(1)(d), and that the rate of such withholding would be 10% under the Canada-US tax treaty. This conclusion was fundamentally based on “a reasonable argument…that Canco’s payments of the PLF to USCo represents consideration for the grant of the Franchise Rights”. However, in order to legally assess such withholding tax, Rulings said the onus was on the TSO to specify precisely which portions of the PLF were subject to withholding tax as being allocable to items described in s. 212(1)(d)(i), (ii), or (iv).